Gold Funding Group Lawsuit: 6 Defenses Worth Raising in Your Answer

If your business has a New York merchant cash advance from Gold Funding Group, and they are suing you personally and your business over it, a number of defenses are worth raising, including lack of jurisdiction or bad service, the disguised loan, criminal usury, reconciliation that was never real, personal guarantee never triggered, and fraud in the inducement. You have 20 days after they hand you the summons in New York, or 30 days if served any other way. A defense you forget to put in your answer could be waived.

In New York, a default judgement from ignoring this kind of suit means the funder can empty your bank account. Since they are suing you personally, note that the guarantee is only as good as the underlying contract so if that fails or has a problem, the guarantee fails with it.

1. Challenge jurisdiction and service

They may not have the right to make a claim against you or your business in court at all. A few defenses include challenging jurisdiction based on forum selection clauses, and making sure they served the papers on you properly. On paper, New York courts usually enforce forum selection clauses, but not always. They could refuse to recognize it for fraud or being unreasonable. Service on an out-of-state owner is often defective, especially “nail and mail” service. You must raise this defense if you want to use it, or you may lose it forever. Usually, this means putting it in your answer or your first motion to dismiss. Location matters for judgments too: from August 2019 on, any judgment that you agreed to when you signed a contract has to be filed in a court near you. And it must be filed within three years of signing.

2. Call it a disguised loan

Merchant cash advances are structured as sales of your business’s future receivables for cash now. They may actually be a disguised loan. To decide if your MCA is a loan or not, courts in New York usually look at three factors. The “L.G. Funding” case in 2020, from the Second Department, sets these three tests. First, does the reconciliation actually happen? Second, is the term finite or indefinite? Third, does merchant bankruptcy count as default? A finding against them on all three makes it look like a loan. The label is not the key, but the economic reality of the deal.

3. Plead criminal usury

It could violate New York’s criminal usury statutes if it’s a loan at over 25% a year. The defense of usury is mainly barred for corporations but not for criminal usury charges. Adar Bays in 2021, in the Court of Appeals, says a criminally usurious loan is void. No principal or interest is collectible. But it’s a defense you have to use, not a counterclaim you can make, as L.G. Funding from 2020 held. They make these look complex, but you just need four numbers: funded, purchased, daily payment, and real term. That last one is key. Calculate the effective annual rate from your numbers. If it’s more than 25% a year, a criminal usury defense may be available.

4. Expose the fake reconciliation

Many MCA contracts let the merchant ask to lower the daily payment if sales drop. But it could be an illusion. It may be invalid if only the funder has discretion, you need impractical paperwork, or they never give a break. Fixed daily payments are a red flag too. If the deal was really a true sale of future receipts, the daily payment could go down when your sales went down.

Look at the bank records to see the truth. A few cases cast shade over the whole business, like the N.Y. Attorney General’s suit against Yellowstone Capital. The AG alleged fixed daily withdrawals did not track revenues. Also, very few borrowers got any refund of funds under the reconciliation provisions.

5. Say the guarantee never kicked in

The guarantor is off hook if the trigger event in the contract never happens. The personal guarantee often can only kick in if the merchant declares bankruptcy, takes funds out to not pay the funder, or suddenly closes down to dodge paying the merchant cash advance. The guarantee doesn’t usually cover merely running out of money.

6. Raise fraud and unfairness

If the broker or funder lied or misstated the cost, daily payment, a personal guarantee, or the consequences of bankruptcy, the guarantee might be voidable. Even if they were honest, if the guarantee is tucked away in the fine print and you signed under time pressure, the guarantee may be unconscionable. Raise these issues in your papers. Under CPLR 3018(b), you do need to come out of the gate with anything that might surprise the other side, such as fraud, illegality, payment, release, or the statute of limitations.

Pull Out the Agreement

Pull out the agreement, the guarantee, the funding statements, your emails and texts with the broker or funder, and all your bank records of every ACH debit. Check for broker promises that don’t jibe with the signed papers.

Present the Offer

Step one is to raise the defenses. Step two is to present the offer. These two steps may be enough to clinch the deal for a much lower payout. If you are paying 80 or 100 cents on the dollar, you are giving away a lot. Once a usury or disguised-loan defense is on file, settlements can be 30 or 50 cents on the dollar, sometimes less. Once the judge lets the lender mark up the file with a judgement, you may need to pay more to resolve it. A stipulated judgment waives all your defenses and so is normally a bad idea.

A free contract review costs nothing and takes a day or two. Call (888) 837-7053, or send the agreements to Delancey Street for a straight read on your options.